Losers are turning out to be winners on China's stock markets as investors are hedging their bets that government, both municipal and provincial, will prop up loss-making listed companies. Zhang Shidong reports on the attraction of "ST" companies and the advantages of betting on a turnaround.

　　As the securities regulator is getting tougher against underachieving public companies on China's mainland, the smart money could be in investing in money-losing stocks for quick and healthy profits in the country's equities market.

　　In China, there is asgroupsof stocks singled out by the regulator to be labeled as special treatment companies, or ST, namely companies that report losses in two consecutive years.

　　From the outset, the regulator hoped such labeling would alert investors to the loss-makers. It did, only to find that the sector had fallen in favor with investors. This was achieved by betting on a turn-around that would eventually send shares prices in such firms soaring.

　　In some scenarios, share prices in the perennial loss-makers ride higher than companies with solid earnings, not least in times of sluggish trading.

　　"If you put moneysintoseach of the ST companies, the result of making money far outweighs that of taking a loss as a result of delisting," said Zhang Qi, a Haitong Securities Co Ltd analyst.

　　"Most of the firms will be bailed out and it is then the strong buying sentiment occurs. Once a white knight comes to a possible rescue, that's when it's likely to see a stock soar."

　　Looking back at the 10-year history of China's stock markets, only 11 of the about 1,200 listed companies traded on the Shanghai and Shenzhen bourses have been expelled from the main board.

　　However, the securities regulator did not get tough on underachieving firms until April 2001, leaving a lot of time for underperforming firms to build up mounting losses.

　　Shanghai Narcissus Electric Appliances Co Ltd, a washing machine maker listed on the local exchange, was the first to fall afoul after posting losses for four consecutive years.

　　Some analysts believe that the underlying reason for Narcissus' delisting could lie in it's lack of strong backing from the local government.

　　Ideally, the government would match a white knight with a troubled firm, giving it a face-lift after corporate restructuring.

　　In China, the majority of public companies are state-owned enterprises with the actual ownership belonging to either the provincial or municipal governments.

　　Once a company in its charge is delisted, the government body, which used to recommend to securities regulator the listing candidates, may find its image being tainted.

　　One example is Shanghai Shuanglu Electric Appliances Co Ltd, a local refrigerator maker that was considered a favorite for delisting ahead of Narcissus.

　　Shuanglu, which used to market refrigerators under the brandname of Double Deer, ran up a mountain of debt and even halted major business operations due to mismanagement and corruption.

　　Given its plight, Shuanglu was believed to need a much larger injection of capital than Narcissus to restore its finance health. Instead, the Shanghai White Cat Group, a local detergent maker, took full rein of the firm.

　　Shanglu used to a be well-managed company with its refrigerator being the household brandname in China. But a lack of innovation and corruption among its top management led to the downfall of the firm.

　　Enter Shanghai White Cat, a successful state-owned enterprise that was looking to go public.

　　At present, Shuanglu has been renamed Shanghai White Cat Co Ltd and some analysts believe that the deal was negotiated with help from the local government.

　　The White Cat back-door listing was a prime example of how interest was created in an underachieving stock.

　　In the past, the China Securities Regulatory Commission adopted an annual planned quota for listed companies, allocating the calculated amount to each province and the municipalities.

　　Once a listed firm ransintostrouble, the shell company became a valuable resource to good quality firms, which were often denied a listing under the quota system.

　　This gave an excuse for buyingsintosa perennial loss-maker.

　　"When it comes to share prices, the ST sector should be the cheapest," said Wu Kan, head of the investment consulting department of Shanghai Securities Consulting Co Ltd.

　　"But that is also why people often say that the sector has investment values. Once there are talks of a corporate overhaul leaking out, its values stand out."

　　Zhang of Haitong Securities added that "the best buying time comes after the release of bleeding annual report as all the negative factors have been digested by then."

　　While investors are enamored with red-ink companies in hopes of making money, the securities regulator is stepping up its campaign to cull unhealthy companies.

　　The latest delisting rules unveiled by the China Securities Regulatory Commission stipulate that publicly traded companies would be halted from tradings in cases of posting losses for three consecutive years.

　　These companies would then be given a half-year grace period before their final fate is decided.

　　When the reprieve expires, companies that continue to drown in red ink will get booted from the main-board market.

　　This seems a big improvement from the old practice in which firms with three straight years of losses were still chugging along.

　　Under the new rule, shares in 12 companies listed on the Shanghai and Shenzhen stock markets have already been halted from tradings due to corporate losses for three consecutive years.

　　Among the 12 were Jinan Qingqi Motorcycle Co Ltd, which posted the biggest-ever full-year loss among domestically listed companies.

　　The Shanghai-listed motorcycle manufacturer reported a hefty loss of 3.4 billion yuan (US million), or 3.50 yuan per share, for the period ending in December last year.

　　The huge loss resulted from the full provision the company made against 2.8 billion yuan in debt still owed by its parent.

　　In spite of that, Haitiong Securities' Zhang appears not to be worried about the woeful figures.

　　"I bet only a quarter of these firms will finally be delisted. The rest will get out of the woods after a bailout from government," he said.

　　Wu of Shanghai Securities Consulting added "speculations on ST companies will likely persist for years, even though we have already seen an element of a new investment concept in which stocks with solid earnings are deemed the priority for investment."